INSIGHT-Private equity feels squeeze from junk loan crackdown

NEW YORK Feb 13 (Reuters) - Big private equity deals have
fallen through or had to be reworked in recent weeks because
many banks, under U.S. regulatory pressure to reduce their
risk-taking, are no longer willing to provide as much debt as
their clients want.

This could lead to lower returns for private equity
investors, because they are being asked to put more of their own
money into deals, potentially reducing their return on equity.
Reuters interviews with several private equity executives and
investment bankers, who asked not to be identified disclosing
confidential information, show that buyout firms now regularly
project annualized returns of about 15 percent when they agree
to deals, even as they promise 20 percent-plus returns to
investors.

Last month, a potential $7 billion acquisition of Canadian
satellite company Telesat Holdings Inc by Ontario Teachers'
Pension Plan and Public Sector Pension Investment Board was
scuppered by financing issues, according to people familiar with
the matter.

A consortium of banks, led by JPMorgan Chase & Co,
had offered to finance the deal for Telesat's parent, New
York-based Loral Space & Communications Inc, offering
much more debt than regulators are comfortable with, the sources
said.

After discussions with regulators, however, JPMorgan revised
its debt financing offer down, offering to lend an amount equal
to closer to six times a measure of Telesat's cash flow known as
earnings before interest, tax, depreciation, and amortization
(EBITDA). A JPMorgan spokeswoman declined to comment. In 2013,
the Federal Reserve and other U.S. regulators set six times
EBITDA as a guideline for the maximum debt they see as
reasonable in most deals.

For two years, banks tested that guideline, and although
they were reprimanded in letters for exceeding it, they were
willing to accept a slap on the wrist. Now, most regulated banks
are no longer willing to go much above the guideline, industry
sources said.

Data is beginning to bear this out-average levels of debt
relative to EBITDA, or leverage, have dropped to 6.3 times so
far in 2015, versus a 6.6 percent average in 2014, according to
Thomson Reuters Loan Pricing Corp. Industry sources expect it to
drop further.

"We are at a point that (the guidance) is actually having an
impact," Joshua Lutzker, a managing director at buyout firm
Berkshire Partners LLC, told the Harvard Business School Venture
Capital and Private Equity Conference earlier this month. "There
are a number of deals that did not get done or that have
restructured."
Continued...